1. Field of the Invention
The present invention is directed to methods and systems for selling and procuring reinsurance. More specifically, the present invention is directed to on-line systems and methods for auctioning reinsurance capacity in one or more categories of insurable products.
2. Background of the Invention
Reinsurance is insurance for insurance companies. Reinsurance covers part of the risk assumed by a direct or primary insurer and, thus, reduces the risk that the direct or primary insurer will experience liquidity problems, or even suffer financial ruin, as the result of a major loss. Reinsurance also provides a means by which a direct insurer can make its portfolio more homogenous. Perhaps the most important advantage of reinsurance is that to the extent that risks with high sums insured and/or high exposures are reinsured, the direct or primary insurer's underwriting capacity can be increased because the reinsurer assumes a share of the risk assumed by the direct or primary insurer. Accordingly, a direct or primary insurer's available equity capital increases because reinsurance frees equity capital bound by risks.
FIG. 1 shows, in a hierarchical manner, the relationship among a reinsurance company, direct insurance companies and the ultimate purchasers of insurance products. Specifically, different groups of insureds 14 purchase insurance from several separate direct insurers 12a, 12b, 12c. In turn, to minimize risk and to maximize liquidity, each of the direct insurers 12a, 12b, 12c may purchase reinsurance from a reinsurer 10. Reinsurance companies thus act to distribute risks among the substantially larger number of direct insurance companies.
Conventionally, reinsurance is sold like direct insurance. That is, a reinsurance sales person develops a relationship with a direct insurance company and offers to the direct insurance company various products that the direct insurer may choose to purchase. For example, a reinsurance company might offer earthquake reinsurance for one geographic region and windstorm reinsurance for another geographic region.
There are two major models or types of reinsurance: proportional and non-proportional. In a proportional model, the reinsurer agrees to assume a predetermined percentage, for example, 70%, of a liability from a primary insurance.
The second model, the non-proportional model, involves the reinsurer taking a discrete slice of a total liability such as, for example, the total liability between $10 million and $300 million. Thus, the non-proportional reinsurance model allows the primary insurance company to build reserves by only covering the first $10 million (in the example given above) of the property and casualty loss.
In other words, terms of non-proportional reinsurance might include coverage of liability borne by the direct insurance company that exceeds a predetermined amount. In another example, the reinsurance company might offer a product that covers liability in the range of $50 million to $500 million for damage resulting from an earthquake in California. Thus, direct insurance companies would be liable to their insureds for up to $50 million and the reinsurance company would be liable for any additional exposure over the $50 million amount, and up to the $500 million amount. The direct insurance companies can thus free up capital that might otherwise have to be kept on reserve to cover the higher levels of exposure. The amount that the reinsurance company agrees to insure is called reinsurance “capacity.” In the example above, the reinsurance capacity is $450 million, i.e., $500 million minus $50 million. It is noted also that a reinsurance company may only provide a capacity percentage, e.g., 30% of the $450 million. That is, in the case of a loss of $350 million, the reinsurance company would pay $90 million (30% of $350 million minus the $50 million).
While direct insurance companies and reinsurance companies are eager to do business with each other, there are several problems associated with the conventional sale of reinsurance products. First, it is very expensive and time consuming to employ reinsurance agents who must maintain relationships with direct insurers and sell products on a piece-meal basis.
Second, it is very difficult to determine whether the reinsurance company is obtaining the highest profit margin from the sale of its products. Using the conventional method of reinsurance sales, the only way to improve profitability is to review past sales of the reinsurance company's products to determine if a higher premium could have been obtained from another direct insurer for the same product.
Third, relatively small primary or direct insurers often do not have access to the offerings of large reinsurance companies since the reinsurance capacity sought is too small to justify contact by a reinsurance salesperson.
In addition, it is very difficult to determine, in real-time, whether a reinsurance company's capacity for a particular reinsurance product has been fully exhausted or whether capacity remains. Thus, if a direct insurer offers to buy from a salesperson a certain amount of capacity, the salesperson might not be able to immediately commit to the sale of a policy without first checking with a main office, for example, to confirm that the sufficient capacity remains such that the policy that is desired can be fully underwritten.
Accordingly, there is a need for improved techniques for selling and purchasing reinsurance products.